A homeowner that wants access to a substantial amount of money may be able to do so by tapping into their home. Home equity refers to how much of your home you currently own. You take the value of your current home and subtract any current liens that are outstanding. This amount would typically be your mortgage amount. If you are thinking about a home equity loan, understand that you’re using your home as collateral. Don’t confuse a home equity loan and a line of credit. These are two different financial products. Each one comes with their own set of rules regarding how you access funds, the fees associated with the loan and how you will repay everything.
What is a Home Equity Loan?
A home equity loan is typically referred to as a second mortgage because of the financing coming from a second loan against your home. The first one provided you with the funds to purchase the home. Now you’re using to get more money for things like home repairs, reducing your overall debt, paying off medical bills or paying for your child’s college education. This loan will provide you with a fixed amount of money that is paid out in one large amount. There is an agreed upon term regarding how you will pay back the loan and how long you have. The majority of fixed loans will come with a fixed rate. No matter how long you have the loan, the rate will not change. Along with paying off the interest payment amounts, you will also pay down the principal until everything is paid off. You can expect the interest rate for a home equity loan to be a bit higher than something like a home equity line of credit due to the fixed rate you receive.
Who Would Use these Funds?
The ideal candidate for a home equity loan would be someone who knows exactly the amount of money that they need to acquire. They are also beneficial if you want your money all at once to control on your own. If you have one major need that requires this money, then you probably want your money in one large sum. Fixed monthly payments are also preferred by most people, which is something you’ll experience with a home equity loan.
What is the Difference Between a Loan and a Line of Credit?
Both of these products have a number of details in common such as closing costs. However, additional fees are often included even in the best HELOC rates. You can purchase points to reduce your rate and you may have annual fees to worry about. The home equity loan functions much more like a traditional loan or mortgage would. Aside from the upfront costs, you usually don’t have much else to worry about over the course of a year. Both are tax deductible and have a fixed rate. A HELOC provides you with the potential to use a variable interest rate. It really comes down to what you feel you need the money for, how much you potentially need and how you want to pay everything back.